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Former Morgan Stanley Asia chief and Yale economist Stephen Roach flags trade under Trump, Tillerson

Stock markets are euphoric after Donald Trump's victory as pundits bet on U.S. economic growth based on the president-elect's stimulus plans, but be aware of trade deficits and funding U.S. consumption, said Yale economist and noted author on China, Stephen Roach

"Given the overall savings of the U.S., that spells bigger trade deficits and for a president who is clearly raising some protectionist flags at a time when our trade deficits are going to widen, that's a big disconnect," Roach, a former chairman of Morgan Stanley Asia and chief economist, told CNBC's "Squawk Box".

"The idea of larger trade deficits colliding with protectionist shifts in policy is a very worrisome development for the U.S. and for the broader global economy," added Roach.

Roach's comments come against a background of Trump having campaigned on remedying a wide trade gap in favor of Beijing that he said was spurred by moves to artificially weaken the yuan and restrict entry into home markets. He has also angered China by taking a congratulatory phone call from Taiwan President Tsai Ing-wen and calling into question the foundations of the "One China" policy. China is the world's top holder of U.S Treasurys, and any major change in that stance would have broad macroeconomic impact.

"The deeper question is less about the integrity of the leadership skills he can bring to the job, but how much scope for action he will have in the Trump administration … (after) Mr Trump has made some very strong statements about a number of critical foreign policy issues," said Roach.

Roach also commented broadly on issues that will have to be resolved in the early phase of a Trump administration, including how a U.S. savings shortfall will be financed, suggesting choices of higher interest rates or a weak dollar as possibilities.

He also expects a reassessment of Trump's economic policies and outcomes in late 2017.

As for Trump's goals to shore up the battered manufacturing industries, Roach said Americans will have to pay a price for penalizing offshore operations.

"As they bring those activities home, the cost of goods sold, the prices that go to American families who are hard strapped who voted for Mr. Trump, those prices are going to go up … We can't have it both ways,"he said.


Stephen Roach
Scott Mlyn | CNBC
Stephen Roach

"If we are bring back activity to higher cost producers, somebody is going to pay for that whether it's the American consumer or the margins that then get factored into the earnings of U.S. multinationals, which are now enjoying increased premiums; there's no free lunch when it comes to unwinding the benefits and the efficiencies of globalization."

As for Trump's nomination of Exxon Mobil CEO Rex Tillerson to the position of the Secretary of State, Roach questioned the amount of discretion he would have to shape policies.

While Tillerson's position on Russia has been much discussed because of previous engagements with the country, his position on the world's second largest economy, China, has been less clear.

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